SPECIAL REPORT - Mechanical Movements : Stormy weather for movements

All crises are revelatory and
speed up or crystallise – in
the chemical meaning of
the term – an embryonic
situation. This is particularly
true of the key sector of
mechanical movements.
The current watchmaking
crisis – which we believe
is not only situational but
systemic – starkly reveals a
serious issue: the current
overcapacity in movement
production. How did it
come to this and who are
the major players in this
sector? What trends are
to be expected? Europa
Star has investigated.

Was it “written” from the
start when Nicolas Hayek
took the controversial decision
to gradually cease deliveries of ETA movements to third parties? Was it imaginable
at the time, in the wind of panic
that started to blow among rival groups
and brands, that this decision, deemed
catastrophic at the time, would stimulate
initiatives to such a degree? Today, while
storm clouds are gathering and becoming
a durable part of the landscape, supply
now largely exceeds demand. To what
extent? There is a basic method to do the
maths: in mid-2016, Swiss watchmaking
fell by about 16%. This figure roughly corresponds
to the drop in ETA deliveries. But
if, as Nick Hayek warned, ETA is effectively
losing its dominance, which is not yet the
case – far from it –, it is also largely due
to the number of competitors that have
acquired much greater independence.

HOW IT ALL STARTED

Everything started around 2002-2003
when ETA and the Swatch Group clashed
with certain ‘finishers’. The latter included
Sellita and La Joux-Perret. They organised
resistance and, at the same time,
considerably bolstered their own production
means. And that is only one example.
The decision taken by the Swatch Group to gradually reduce its sales of
mechanical movements to third parties
and ultimately end all deliveries, except
for a few carefully selected brands,
also gave a very serious boost to rival
watchmaking groups.

The late Nicolas Hayek’s wishes to
“thus stimulate the development of
alternatives” came true, and well beyond
his expectations. Despite the risk,
almost 15 years on, of backfiring on his
own group’s interests!
To deal with the threat identified in 2002,
everyone started to gear up their industrialisation
plans and win back their autonomy.
Richemont made a considerable effort with its own manufactures, TAG Heuer embarked on industrialisation,
and Rolex achieved full autonomy. All
this ended up by cutting the umbilical
cord that organically linked Swiss watchmaking
to ETA. Not to mention the
countless independent initiatives that
were taken, the specialisations and the
whole field of innovations that opened
up. Because demand was everywhere.
Everyone wanted to own their own mechanical
movement. But not everyone
had the necessary means.

“We are not a supermarket here for your
weekly shop,” is what the Swatch Group
essentially said. Indeed, for the past 30
years, the whole Swiss watchmaking
industry had rushed to the aisles of ETA
which offered a gamut of trusted, precise,
tested and repairable movements.
The most cunning players were quick
to latch on. At the peak of the trend for
mechanical watches, once they were
properly packed, encased in gold and
studded with diamonds, these rustic mechanical
watches could fetch very large
sums of money. Especially in the realm
of new watchmaking conquests. Asia, the Orient, international hubs, new shopping
malls, rich crowds of customers hitherto
ignorant of watchmaking... Nicolas Hayek
therefore had reasons to believe that he
had become a cash cow, at least for some.

“We currently see that
third-party orders have
slumped to such an
extent that we will no
longer be in a dominant
position by 2017.”
Nick Hayek, Le Temps, 21 July 2016

THE 2012 DECISION

The COMCO, the Swiss Competition
Commission, managed more or less to
keep a close watch and, through legal action
and compromises, kindness and dirty
tricks, the decision was taken ten years
later. In 2012, the Swatch Group was officially
allowed to apply its timetable: “a
15% reduction of deliveries of mechanical
movements to brands using them for
their own watches, and a 30% reduction
to customers who also have a movement
production unit but do not make their
own completed watches.” That was just
the beginning. As for strategic balance
springs and assortments, for which the
group holds a virtual monopoly (90%)
through Nivarox, “an initial reduction
of 5% on 2010 orders” was announced.

Today, with the advent of a systemic
crisis that few headquarters had anticipated,
what is the status of the supply
of Swiss mechanical movements?
Not forgetting that, in this new landscape,
fresh ambitions are burgeoning.
Citizen, for example, the global heavyweight
in Japanese watchmaking, does
not conceal its intentions and is calmly
positioning its pawns in the Swiss game
[see the article by Joe Thompson in this
issue BRANDS - CITIZEN’s changing times]. Germany is seriously waking up.
Nomos, for example, which became independent
by producing its own movements
and selling its reasonably priced
watches successfully, has become a case
study for others. Not to mention Chinese
watchmaking, which our watchmakers
still tend to look down on but which is
spectacularly gaining ground in the improvement
of its mechanical productions.
So the battle looks tough and some people
we met in the industry even talk about
a ‘cold war’ of movements. A ‘war’ that
is particularly tough given that stocks are
full. It is even said that some major brands
have stockpiles for one or two years! Not
to mention the many retailers who are
brimming over with goods.

SUPPLY NOW EXCEEDS DEMAND

The obligation on ETA to deliver to third
parties runs until 31 December 2019. In
2016-2017 ETA was authorised to deliver
no more than 65% of what it had
delivered on average between 2009-
2011, ‘equally’ regardless of the customer.
Has it stuck to this timetable? The
question is worth asking.

“Have you heard it said that ETA lacked
customers? I can’t criticise my salespeople
for wanting to sell,” stated Nick Hayek to
our colleague at Le Temps. “We never said
we didn’t want to sell any more to anyone,
but that we wanted to be able to choose
our customers,” he also explained. Is the giant doing a U-turn? And what will happen
between now and the fateful date of
2019? The situation is so confused that
no-one will hazard a guess. The crisis has
turned everything upside down. And we
can’t forget another factor: the arrival
of the connected watch which has just
further muddied the waters. What will
become of the mechanical watch? Will
it lose its status once and for all? No
one we interviewed believes that scenario
and all are convinced that the
mechanical movement, that ‘cultural
product’, is here to stay. In the meantime,
the anxiety remains palpable.

“Within a year or so, the market will include
too many manufacturers of entry
level mechanical calibres priced between
50 and 300 francs. ETA has resumed delivery
of movements, opening the door to
very competitive prices,” Valérien Jaquet,
a manager at Concepto, in La Chaux-de-
Fonds, told Europa Star.

“Supply of movements on the market is
too high, it’s becoming a real problem,”
added Jean-Daniel Dubois, of Vaucher Manufacture.

Sébastien Gigon, of Technotime, is extremely
angry and does not beat about
the bush, telling Europa Star that he is
“very surprised at ETA’s U-turn, which we
believe is unethical. You can’t take legal
action [through COMCO] to reduce deliveries,
call on alternative solutions then
change your position according to market
conditions. It’s neither consistent nor
the right attitude for an industry leader.
Nicolas Hayek Senior had a vision that
saved the Swiss watchmaking industry.
Now, the whole ecosystem is threatened.
People have invested heavily. So is it all a
Machiavellian plot to get rid of alternative suppliers? Ronda will also suffer, having
invested 25 million francs. For the time
being, we can’t see any reactions among
our competitors, but they will come. We
cannot take ETA to court as they have
taken all the right precautions through
their legal advisers. We’re attacking them
from an ethical angle. Legally, we can do
nothing but morally, it’s not right.”

Not everyone, however, is fundamentally
upset at seeing ETA return to centre stage
and put things back in order – as the
“vacuum” created was rapidly filled, but
not always with the most Swiss of pedigrees...
Pascal Dubois, co-director of the
Dubois Dépraz movement manufacture
and specialist of the additional module,
present at the EPHJ show with a range
of new features, agreed that “when ETA
closed the tap, it opened opportunities
for ‘cheats’. If reopening it may get rid of
those that did not make genuine Swiss
made movements, at least it will clean up
the market.”

THE STATE OF PLAY

Against this strained backdrop and in
these circumstances that offer very little
medium-term (never mind long-term)
visibility, several projects and developments,
requiring heavy investment, are
nevertheless coming to maturity.

At Baselworld this spring, ETA was back
with a stand, after being absent since
2011. A stone’s throw away, Ronda,
previously restricted to the quartz field,
where it is the only genuine credible
Swiss competitor, launched its first mechanical
movement with much fanfare.
This development had been in the pipeline
for several years and required very
heavy investment – around 25 million
Swiss francs. At the same time, Oris announced
its intention to gear up with
its own movements [on this subject,
see our article in the previous issue of
Europa Star 3/16]. Eterna Movement
also announced new ambitions... These
are just some of the most representative
examples. To establish the facts,
Europa Star tried to take stock of the
current situation.

Collating all this information and these
opinions was not an easy task. People
are obviously afraid of the giant Swatch
Group. (The Swatch Group did not respond
to our efforts to contact them or to
our requests for interviews). In the past 10
years, ETA has continued major R&D efforts
and has managed to develop COSC certified movements for watches under
1,000 Swiss francs on existing foundations
and has managed to increase the
power reserve of basic movements up to
3 days. ETA keeps these ‘new’, more high
performing movements for the group’s
brands – which can be considered fair
enough but which gives them a decisive
competitive edge. “The concentration
process will continue during the current
crisis and I am convinced that the major
dominant groups secretly dream of the
survival of only 30 or 40 brands,” confided
an anonymous specialist in the field.
And very recently, in July, ETA increased its
prices by 1.8% across the board (COMCO
forces it to sell at the same price internally
and externally). Meanwhile, a new battle
is looming on the horizon. As another of
our anonymous sources explained, “ETA
cannot afford to dump as they still have
the monopoly. And according to the
agreement with COMCO, it would be illegal
for them to increase the number
of customers to whom they deliver. They
therefore want to modify this agreement
so that, in the event of fewer orders being
placed than expected by their current
customers, they may be free to deliver to
whomever they want.” This has not yet
been settled. But a certain weariness, including
at COMCO, is beginning to set in.
This state of affairs has lasted too long.
Some believe, “we should now let everyone
do what they want to do.”